by T. GormanPosted on Posted in SECActions

Crypto currencies and SARs are two recurring matters in recent SEC Enforcement Actions. The agency has brought a series of cases and issued warnings regarding the necessity of complying with the federal securities laws when dealing with coin offerings. Last week, for example, Commissioner Hester Pierce discussed crypto currencies in a speech. Similarly, SARs – Suspicious Activity Reports – are an area of continuing interest to the Enforcement Division as reflected in recent actions.

The SEC’s Enforcement Division’s focus on crypto currencies and SARs may have converged in a May 9, 2019 advisory issued by the Financial Crimes Network, or FinCEN, titled Advisory on Illicit Activity Involving Convertible Virtual Currency (here). The advisory appears to be a broad warning regarding the nefarious use of crypto currencies. It is addressed to CEOs, COOs, Chief Risk and Compliance Offers and Cybersecurity Units.

Using subtitles such as “The Risks Posed by Virtual Currencies,” and “Darknet Marketplaces,” the Advisory trumpets the dangers of these currencies. Its potential reach and application is perhaps best reflect in the subtitle offered at the outset: “Criminals continue to exploit virtual currency to support illegal activity, money laundering and other behavior endangering U.S. national security, including through entities facilitating its anonymous use,”

In fact, the Advisory is narrowly drawn, focusing largely on two points. One is the used of convertible virtual currencies or CVCs. The other is a subset of peer-to-peer or P2P exchanges, particularly those tied to the dark web.

CVCs create a risk of illicit financial transactions, according to the Advisory, because of the global nature, distribution structure and limited transparency of the most widely used virtual currency systems. According to FinCEN “New types of anonymity-enhanced CVCs have emerged that further reduce the transparency of transactions and identities” as well as the source of the transaction. Indeed, some transactions appear to have been crafted for concealment. This makes it difficult for law enforcement to identify these transactions. At the same time, it places increased emphasis on compliance by financial institution with anti-money laundering/counter terrorism (AML/CFT) systems, according to the Advisory. The prevalence of unregistered CVC entities that lack adequate AML/CFT controls enhances the risk from these transactions.

The advisory also focuses on a limited class of P2P transactions. Generally, these exchanges involve individuals or entities offering to exchange fiat currencies for virtual currencies or one virtual currency for another. The transactions are typically informal and may be on-line or in-person. Those involved in the transactions are frequently money service businesses or MSBs, some of which are foreign based. P2P exchange functioning as MSBs are required under to comply with the Bank Secrecy Act and the implementing regulations. Many involved in these transactions may, however, not be registered.

Transactions such as these with little transparency – a result which at times may be by design – increase the risk of illicit transactions involving money laundering, sanctions violations and similar prohibited conduct. To aid in identifying these transactions the advisory lists a series of 30 possible red flags tied largely to either to the darknet or unregistered P2P exchanges. Those include:

· A CVC address linked to the darknet or illicit activity;

· A customer address tied to illicit activity;

· Blockchain analytics indicates that the transferring CVC has a suspicious source;

· Surrounding facts and circumstances suggest an intent to conceal;

· Customer receipt of multiple cash deposits or wires from a number of institutions shortly prior to using the funds to acquire virtual currency;

· Customer receipt of a series of deposits from various sources that in aggregate are about equal to fund transfers to known virtual currency exchange platforms in a short time; and

· A customer phone number or email address that is connected to a known CVC P2P exchange platform advertising exchange services.

While the Advisory focuses on CVC and select P2P transactions tied to a lack of transparency, it speaks broadly in terms of crypto currency transactions. Since crypto currencies emanate from an “off the grid” culture, the lack of full transparency for such arrangements should not be a surprise. Nevertheless, CCOs and others responsible for compliance would be well advised to carefully monitor their systems for the type of transactions identified in the Advisory as well as other similar ones.

SEC 85th Anniversary Gala: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. There will be cocktails and dinner followed by a brief program featuring remarks by SEC Chairman Jay Clayton. For further information regarding tables and tickets please contact the Society on or before May 17, 2019 here (full disclosure Mr. Gorman is the President of the Society).

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by T. GormanPosted on Posted in SECActions

Chairman Jay Clayton testified on Capitol Hill this week, requesting an increase in the budget for fiscal 2020. Additional funds are necessary, the Chairman noted, to increase the size of the staff which currently stands at about 4,500 members.

Enforcement filed five actions this week. One, based on a financial fraud, focused on dumping inflated assets off the books of a firm while two alleged inside trading, one of which was against a person who misappropriated material corporate information from a friend to either trade or tip others but did not obtain any trading profits. A third action centered on a financial fraud by an Apple Inc. supplier who tried to conceal the fact that it failed to produce the iPhone component required by its contract with the tech giant. Finally, an FCPA books and records and internal controls case was brought against Brazil’s telephone firm based on its failure to maintain the proper books and records when providing tickets and hospitality to dozens of government officials at the World Cup and another conference.

SEC

Remarks: Commissioner Hester Peirce delivered remarks titled How We Howey at the Securities Enforcement Forum, East Palo Alto, California (May 9, 2019). Her remarks focused on issues related to digital assets, a recent staff no action letter in that area and related issues (here).

Testimony: Chairman Jay Clayton testified before the Financial Services and General Government Subcommittee of the U.S. Senate on Appropriations (May 8, 2019). His testimony focused on the budget for fiscal 2020, requesting an increase to hire additional staff and reviewed key events from the prior year (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 3 civil injunctive action and 2 administrative proceeding this week, exclusive of 12j and tag-along actions.

Financial fraud: SEC v. Williams, Civil Action No. 19-cv-01878 (S.D. Ind. May 9, 2019) is an action which names as a defendant Danny Williams, the president of Quality Companies, LLC. Over a two year period beginning in 2016 Mr. Williams participated in a fraudulent scheme which enabled trucking firm Celadon Group, Inc. to conceal certain losses. Specifically, Celadon Group, Inc. had over one thousand trucks on its books at inflated prices. Mr. Williams participated in a series of transactions which appeared to be unrelated but together permitted the old trucks to be removed from Celadon’s books in exchange for different trucks from the same parties at similar prices. While the Celadon board and auditors thought the sales were at current market prices and unrelated, in fact that was not true. Eventually the new trucks were moved off-book at inflated values. Celadon filed inaccurate financial statements with the Commission at the conclusion of the transactions. The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 20(e). This case is related to the action brought by the Commission against Celadon Group. The case is pending. Mr. Williams has pleaded guilty in a parallel criminal action brought by the U.S. Attorney’s Office for the Southern District of Indiana and the Department of Justice. See Lit. Rel. No. 24466 (May 9, 2019).

Insider trading: SEC v. Schumann, Civil Action No. 24465 (W.D. Tenn. May 9, 2019) is an action which names as defendants Lloyd Schuman and Dane Janes, two friends who were internal auditors at, respectively, Verso Corporation and Ashford Hospitality Trust and Ashford Hospitality Prime. In the fall of 2013 Mr. Schuman learned that his employer was about to acquire NewPage Holdings Inc. Prior to the deal announcement he purchased shares and tipped a relative. Following the deal announcement on January 6, 2014 the share price for Verso closed up 393%. Mr. Schuman sold all of his shares for a profit of $107,000. His relative had profits of about $2,500. Later in 2014 when Dean Janes learned information about three material nonpublic events concerning AHT and AHP, Mr. Schuman was informed and traded. Ultimately, he had profits of about $15,000. The complaint alleges violations of Exchange Act Section 10(b). To resolve the action each Defendant consented to the entry of a permanent injunction based on the section cited in the complaint. In addition, Mr. Schuman will pay $122,574 in disgorgement, $21,341 in prejudgment interest and a penalty of $15,150. See Lit. Rel. No. 24465 (May 9, 2019).

Insider trading: SEC v. Fettner, Civil Action No. 9:19-cv-80613 (S.D. Fla. Filed May 7, 2019). Defendant Brian Fettner is a long-time friend of the General Counsel of Cintas Corporation, a Cincinnati based firm. The two men had been friends since high school and frequently stayed at one another’s homes. On June 14, 2016, Mr. Fettner traveled to Cincinnati to play in a charity golf tournament with General Counsel. He stayed at the home of his friend. At the time Cintas was in merger discussions with G&K Services, Inc., a firm engaged in a similar line of business. By mid-June the discussions had progressed. G&K provided General Counsel with a draft nondisclosure and standstill agreement for review. General Counsel took the papers home in a folder that included other documents pertinent to the transaction. He put the folder in the office/den in his home. On June 15, 2016 Mr. Fettner went into the office/den to put on his golf shoes. While in the room he saw the documents regarding the then under discussion transaction. Mr. Fettner did not mention the materials to his friend. Rather, the two men left the house to play golf. Later that day Mr. Fettner purchased shares of G&K common stock through the account of his ex-wife. Subsequently, he persuaded his girlfriend and father to buy stock while purchasing additional shares in the account of a former girlfriend and again in his ex-wife’s account. When the acquisition was announced on August 16, 2016, the share price rose about 17.7%. Collectively the accounts of ex-wife, girlfriend, former girlfriend and father had profits of at least $250,000. Mr. Fettner did not obtain any of the trading profits. The complaint alleges violations of Exchange Act Section 10(b). To resolve the case Mr. Fettner consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to pay a penalty in the amount of $252,000. The ex-wife and former girlfriend were named as relief defendants.

Overcharging: SEC v. Gennity, Civil Action No. 17-cv-7424 (S.D.N.Y.) is a previously filed action against, among others, broker Rocco Roveccio. The Court entered a final judgment by consent, imposing permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, the order required the payment of $147,115 in disgorgement, $17,499 in prejudgment interest and a civil penalty of $160,000. In a separate administrative proceeding Mr. Roveccio was barred from the securities business. The Commission’s complaint alleged that over a two-year period, beginning in 2012, Mr. Roveccio and others recommended to seven customers a course of high cost in-and-out trading that ran-up substantial fees while largely depleting the customer account. See Lit. Rel. No. 24464 (May 6, 2019).

Financial fraud: In the Matter of GT Advanced Technologies Inc., Adm. Proc. File No. 3-19156 (May 3, 2019) centers on the efforts of a manufacturer to conceal is failures under a contact with Apple Inc. GT Advanced is a manufacturer and supplier of sapphire glass, used by Apple as a cover for its next generation iPhone. In October 2013 the company secured a contract with Apple to supply the product. The agreement had two key components. One component set performance standards under which GT would supply the iPhone component over a period of time and meet certain milestones. The other component stipulated that Apple would make quarterly advances to the company to facilitate the process. Virtually from the beginning, GT had difficulty complying with the contract specifications as CEO Thomas Gutierrez and other officials knew. In April 2014 Apple made another payment. Yet the next month an Apple supply executive warned Mr. Gutierrez in a text message that the low quantity of sapphire produced was a “major problem.” Apple advised the firm in July 2014 that it would not use sapphire glass for its iPhone 6 launch. While Apple rejected a request to revisit the schedule, GT missed the fourth milestone in the contract, giving Apple the right to accelerate repayment of the advances. Although GT did not seek a waiver of its obligations, the firm it did falsely claim that Apple was in breach of the contract. In early August Mr. Gutierrez held an analyst call. During the call he stated that Apple was expected to make the fourth installment payment in October 2014. Several days later the claims were reiterated. Those claims were also reflected in the second quarter financial disclosures regarding sources of cash, liquidity, backlog and EPS projections included unsupported sales projections for sapphire glass furnaces. The projections assumed sales despite the fact that Apple had refused. Eight weeks after the second quarter filing containing these statements, GT filed for Chapter 11 bankruptcy. The Order alleges violations Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings GT consented to the entry of a cease and desist order based on the sections cited in the Order. See also In the Matter of Thomas Gutierrez, Adm. Proc. File No. 85768 (May 3, 2019)(Proceeding against GT CEO based on same factual allegations; resolved with a similar cease and desist order excluding Section 13(b)(2)(B), and the payment of disgorgement of $15,510.00, prejudgment interest of $2,993.91 and a penalty of $125,000).

Anti-Corruption/FCPA

In the Matter of Telefonica Brasil S.A., Adm. Proc. File No. 3-19162 (May 9, 2019) is a proceeding which names the firm as a Respondent. It is the largest telecommunications company in Brazil whose ADRs are registered with the Commission. In connection with the 2014 World Cup Respondent furnished tickets and related hospitality to 93 government officials. The prior year, in connection with the 2013 Confederations Cup, the firm provided tickets and related hospitality to about 34 government officials. The books and records of the firm did not accurately reflect these transactions. Respondent also did not have adequate internal controls. Accordingly, the Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Respondent will pay a penalty of $4,125,000.

Criminal cases

Offering fraud: U.S. v. Bennett (N.D. Cal. Filed May 3, 2019) is an action which charges John Bennett with six counts of wire fraud, two counts of money laundering and one count of aggravated identity theft. The charges are based on a year long scheme that began in August 2017 in which Mr. Bennett is alleged to have defrauded investors into purchasing shares of Relatively Research. Defendant falsely claimed that the firm had a $10 million capital investment, seven offices world wide, over 15 thousand employees, gross revenue of over $36 billion in the fourth quarter of 2016 and profits of almost $30 million in the same quarter. In addition he falsely claimed that the firm’s shares were about to be listed on NASDAQ Private Market. The investor funds were either spent by Mr. Bennett or transferred to his overseas bank account, that of his mother or of his girlfriend.

Singapore

Digital currency: The Monetary Authority of Singapore stated in response to questions from the legislature regarding digital currency that it had authority to regulate tokens under the Payment Services Act passed in January 2019. Under that Act there is a distinction between e-money and digital payment tokens, both of which can be used for payments. E-money is denominated in or pegged by the issuer to a national currency. Digital payment tokens are not. The regulator’s response details other provisions of the Act here.

Event: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here on or before May 17, 2019 (full disclosure Mr. Gorman is the President of the Society).

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